9/28/2007 @ 10:00PM

Pet Projects

Timeshare developer David Siegel is a great salesman–and his biggest pitch is the story of how successful he is.

When timeshare tycoon David Siegel visits a newly constructed resort, he’s not just checking up on big cost overruns. He’s inspecting the furniture he preselected, the showerhead and flat-screen TV in each unit. He tests pillows by sleeping on them at home before picking the half-dozen that will end up on all beds. He reviews every expense, no matter how small, and recently questioned a bill for rental plants, including palm trees; now all timeshare units at Westgate Resorts have silk flowers. “There is no democracy,” says Siegel, who founded Westgate 27 years ago. “I make all the decisions.”

A little dictatorship never hurts in the dicey timeshare business. Losing control of any details can send finances reeling. “It takes a lot of money to keep the business running,” says Siegel, who owns 100% of Westgate. “You have to keep borrowing to keep growing.” The thirst for capital comes from the fact that both the construction cost of a resort and the considerable expenses of marketing it (40% to 50% of gross revenues) must be paid up front, while payments from customers come in very slowly. His buyers–Siegel refers to them as the “Johnny Lunch-Bucket crowd,” who “shop at
Wal-Mart
and otherwise would stay in a Ramada Inn”–pony up roughly 10% initially, or $2,400 for the right to stay one week per year in a two-bedroom apartment. They pay the other $21,600 over ten years (often borrowing it from Westgate, which makes much of its money on financing), plus a $599 annual maintenance fee.

Siegel, 72, enjoys life on the edge. A onetime deputy sheriff, TV repairman and gas station owner, he has built Westgate into one of the nation’s largest privately held timeshare developers. (He unhesitatingly says he’s the biggest. “Successful people are not humble,” he says. “You have to toot your own horn.”) His 28 resorts in 11 states–450,000, he says, have bought 8,000 units from him–represent the bulk of his net worth, which we estimate at $1 billion. Siegel insists he’s worth $1.8 billion; Westgate contacted this magazine earlier this year to lobby, in vain, to get him a spot on The Forbes 400 list.

Siegel and his third wife, Jacqueline, a former Mrs. Florida who is three decades his junior, are building a 90,000-square-foot lakefront house in Orlando, Fla. for them and their seven children, all under age 11. Versailles, as it’s called, will have a roller rink, 6 swimming pools, a bowling alley, 10 kitchens and 30 bathrooms.

And there are big plans for Westgate. Siegel intends to spend $1 billion, funded from operations and bank debt, to build 4,000 units in such places as Myrtle Beach, S.C., Gatlinburg, Tenn. and Anaheim, Calif. He has already dropped $100 million in cash and says he will invest another $1.1 billion in his chichiest project yet: a joint venture with Planet Hollywood to build a 2,853-unit tower in Las Vegas. Delayed two years and three times as expensive as originally budgeted, it is now slated for a 2009 opening. “Once the Westgate name is on top of the 50-story icon property,” says Siegel, “we will be a brand, and it will give us more credibility.”

Credibility is something this business could use more of. But consumer protections, as well as offerings from such respected players as Wyndham, Marriott and
Starwood
, helped push industry sales above $10 billion last year from $2.7 billion a decade ago. Exchange services that let timeshare owners trade their weeks for other ones around the world have also helped to juice revenues. But the business still has a whiff of slick sales tactics and funky accounting. Says Howard Nusbaum, chief executive of the industry’s trade organization, American Resort Development Association: “We don’t get the respect [hotels] do.”

Siegel mastered the art of the quick buck while very young, growing up in Indianapolis and later Miami. At age 4 he begged his mother to let him deliver newspapers like his older brother. A few years later he would get a box of bubble gum from his dad, who owned a grocery store, and cut it into ten pieces to resell for a dime apiece at school. At 19 he enrolled in an electronics school to learn TV and radio repair, then brought in busted-up equipment for his instructors to fix, and got paid for it. The school president told him to quit the business or quit school. Instead, Siegel opened a repair shop and hired his teacher to work for him.

Over the next decade Siegel hopped around a lot. He tried his luck in Hollywood, returned to Florida to become a deputy sheriff, attended the University of Miami, joined the U.S. Air Force Reserve to avoid being drafted and started several businesses (three of which failed). He lost his repair shop, plus his house and car, after being called up on active duty for a year. He later borrowed $600 to open another TV repair business, which fell apart soon after his manager was shot and killed at the store. A furniture store he opened was firebombed and looted during riots in 1968. Wiped out, he took a job selling land over the phone but says he was fired for not following sales procedures. In 1970 he moved to Orlando to sell land, divorced his first wife and married his high school sweetheart.

Siegel found his footing that first year in Orlando, when he tried to sell a woman 11/4 acres of land for $5,000. She said it sounded pricey and pulled out a brochure for land in the same area selling for $500 an acre. He dismissed it as swampland and persuaded her to buy from him instead; when she went to get her checkbook, he slipped the brochure into his pocket. That Friday he agreed to buy all 1,280 acres of “swampland” for $640,000. He wrote a $25,000 check for the deposit, even though he didn’t have the money to cover the check. On Monday he went from bank to bank until he persuaded one to lend him money. He then found a private investor to front him the rest.

Over the next few years Siegel sold enough property to stash $3 million and buy a few apartments, old hotels, a tourist attraction called Mystery Fun House and an orange grove near Disney World. One day in 1980 a man offered to pay him double the market value for 10 acres of the grove, explaining that he wanted to develop a timeshare business on it. Siegel demurred–and instead built his own timeshare villa. Two years later he began selling 16 units out of a tent at the back of the grove. He did well enough to throw himself a retirement party on his 50th birthday in 1985–a plan that obviously proved to be premature.

Siegel’s messy private life nearly did him in. During 1997 divorce proceedings, he says, Bettie, his wife of 27 years and 50% owner of his business, refused to authorize loans needed to keep operations going unless Siegel signed over $200 million. Siegel says he relented, on the condition that he keep 100% ownership of Central Florida Investments (CFI), whose holdings included Westgate, as well as his Bill Mack sand sculpture called “Harmony,” his stamp collection and, yes, his Rollerblades.

In the midst of the contretemps Siegel fired Alan Rainey, his chief financial officer. Rainey sued for his severance, and says he was fired for giving unflattering testimony in a deposition. Soon after the divorce settlement CFI’s chief, Ronald Leventhal, who was married to the sister of Siegel’s first wife, quit to start a rival outfit and was later joined by Rainey and two dozen of Westgate’s managers. Siegel later sued his onetime executives, claiming they gave him misleading information about Westgate’s financials. As a result, he says, his divorce settlement–which he tried, unsuccessfully, to undo–was based on an inflated valuation of his business. Siegel and Leventhal settled; the case involving him and Rainey is ongoing. “The projections were not inflated,” Rainey says. “Look at the empire he’s built.”

The setbacks merely recharged him. He’s been expanding ever since. Siegel builds more massive resorts (average number of units is 357, versus 109 for the industry) in high-traffic areas like Orlando, Williamsburg, Va. and Myrtle Beach. Siegel adds amenities, such as the Jurassic Park miniature golf course at the Westgate Vacation Villas near Orlando and a 60,000-square-foot indoor water park at the Westgate Smoky Mountain Resort in Gatlinburg.

The costs of frills is nothing alongside those of marketing. Siegel spent $259 million funding five call centers and up to 1,700 telemarketers and 2,600 salespeople during peak season, as well as 500 Web sites that offer discounted vacations to people willing to listen to a resort sales pitch. In Orlando, for instance, Westgate has set up booths in 7-Eleven stores, Universal Studios’ theme park and hotels, where it offers free or discounted tickets to Disney World, Sea World or Universal in exchange for taking a 90-minute tour of a resort. A show at Westgate Vacation Villas featuring live white Siberian tigers has drawn crowds, but it has also incited animal rights protesters, who picketed Siegel’s resorts and home until he got a court injunction.

Perhaps 600 people show up at 7 a.m. on a Monday to take a tour of the gigantic Westgate Vacation Villas, lured by the offer of the theme-park tickets. After a buffet breakfast (gratis) and a half-hour look at the place, potential buyers are herded into a large room for the hard sell. If after that a customer still isn’t sold, his salesperson leaves to get a gift bag with the tickets and brings over another sales associate who pitches a sampler package–a trial week at one of the resorts for $800 to $1,500, less than what it costs to stay in a motel. Westgate claims that one in five tour-takers eventually buys a unit, twice the estimated industry average. Of those, 6% reportedly rescind (the states variously allow three to ten days to back out), versus 13% for the industry in 2006; another 15% eventually default.

Pushiness hasn’t hurt Westgate’s business, which Siegel claims netted $154 million on revenue of $608 million last year. But it’s not that simple. Timeshare accounting is done on a completion basis. By that measure Westgate’s sales were really $379 million, since it had to defer $229 million worth of projects sold last year that are still under construction. And as for those earnings, they’re in fact lower, thanks in part to new accounting regulations that require most sales and marketing costs to be recognized as they occur, not deferred, as in the past. Nor do those profits reflect payment of taxes. That’s done through Siegel’s holding company, Central Florida Investments. Assuming rates of 34%, Westgate netted roughly $50 million. It’s a highly leveraged outfit: As of Dec. 31 it had $816 million worth of notes payable and lines of credit. A major creditor is Siegel himself, who has lent the company $112 million.

He’s keeping an eye on that investment, shuttling back and forth to Las Vegas every other week to inspect his prize property. On a recent visit he spotted 25 changes he wanted to make to the model. “I didn’t like the door trims or the granite on the sink; the kitchen lights weren’t bright enough; I wanted the width of the doorway to the bedroom expanded a foot,” he says. “Unfortunately, the people who work for me can’t see what I see. I am like a bull who sees red.”